The Open-Book Revolution

More and more CEOs have discovered what was missing from all the past decade's management cures -- and have invented a new way of running a company that overturns a hundred years of managerial thinking. The new system gets every employee to think and act like a businessperson -- to compete -- and it gets astonishing results. It's called open-book management, and this is how it works

Poke your head into enough companies these days and you come away with a sense that American businesspeople are earnestly, diligently, maybe even desperately searching for a new way to run their companies.

Even traditionalists -- if there are any left -- will recognize the buzzwords. Total quality management! Teams! Empowerment! Reengineering! The old top-down, chain-of-command style of management is out; today's boss is supposed to walk around, involve the troops, and encourage participation. Gone, too, is the notion that employees are no more than tiny cogs in a machine. Workers are now supposed to take on big responsibilities -- to solve problems, cut costs, and reduce defects. The language of business reflects the new ideas. Trendy companies don't have employees, they have associates. They don't have managers, they have coaches.

All this experimentation and exploration should come as no surprise. The old way of running a business was born a century ago, and it's showing its age. (See "Ending the Hundred Years' War," page 8.) And there's no comparison between today's white-hot global competition and the stable markets of even 20 years ago. In the past, businesses needed people who would show up for work every morning and do what they were told. Now they really do need employees who work smart as well as hard -- and who are looking out for the company, not just for themselves.

Trouble is, the best-known of the new managerial methods have a pretty spotty record.

Quality efforts, for example, often improve quality. They don't always improve the business. At Varian Associates Inc., a maker of scientific equipment, employees got so obsessed with quality-related measures that they quit returning customers' phone calls. "All of the quality-based charts went up and to the right," a Varian vice-president confesses. "But everything else went down."

Reengineering can help companies cut costs -- except that it's usually seen as a euphemism for layoffs, with predictable effects on morale and productivity. "Reengineering is in trouble," admits one of the consultants who coined the phrase.

Teamwork and empowerment programs have their success stories -- so long as you catch them before they fade away. "We used to do a lot with teams," one small-company chief executive told me sheepishly. "We should probably get back to that."

Meanwhile, people who think about these things for a living argue that even after a decade and a half of experimentation, something is still missing. A new paradigm. A central organizing idea. "The fundamental principles of a new managerial paradigm are far from clear," observes David H. Freedman in Harvard Business Review. Rosabeth Moss Kanter, one of the nation's best-known business thinkers, agrees. Each of the "management buzzwords and fads of the last decade," she argues, is like "a way station" on the road to a comprehensive rethinking of the business organization.

But what the pundits haven't yet caught sight of is the growing number of companies that have been getting a lot farther down that road. I recently spent 18 months visiting many of those companies, and what they're coming up with seems to me to be as close to a new paradigm or a comprehensive rethinking of management as we're likely to get.

They're calling it open-book management.

The beauty of open-book management is that it really works. It helps companies compete in today's mercurial marketplace by getting everybody on the payroll thinking and acting like a businessperson, an owner, rather than like a traditional hired hand.

The open-book companies are all over the map, in every kind of industry and business situation. Bob Frey, owner of a small Cincinnati packaging manufacturer called Cin-Made, turned his business around with open-book principles. So did Bob Argabright, manager of Chesapeake Packaging's big corrugated-box plant in Baltimore. Manco, an immensely successful consumer-products distributor headquartered near Cleveland, has built the open-book approach into its operations for years. Acumen International, a small but growing personnel-assessment company in San Rafael, Calif., adopted it just last year.

The best-known practitioner of the new approach is Springfield Remanufacturing Corp. (SRC), in Springfield, Mo., which calls its system the Great Game of Business. SRC's Great Game has spawned hundreds of emulators -- who now gather once a year to swap stories and tips about implementing the open-book approach. (The third of the annual get-togethers is coming up in September.) Every month, another 30 to 35 companies send representatives to Springfield (at $950 a pop) for a two-day seminar on SRC's system.

By now the game-playing group includes some sizable organizations: Allstate's business-insurance unit, Sprint's Government Systems Division, Amoco Canada, and even -- as of last year -- the giant ZCCM copper mine in Zambia, a 50,000-employee enterprise that is the economic mainstay of that struggling African nation. It also includes plenty of small everyday companies, as you can discover by visiting SRC's Springfield neighbors. Walk into the Pontiac-Cadillac dealership or into a local building-supplies store. Talk to the guy who runs the area's fastest-growing commercial-cleaning service or to the brothers who own a heating-systems manufacturer. Open-book partisans, all.

Nearly all the open-book companies can boast some startling business accomplishments. SRC transformed itself from a small, money-losing division of International Harvester (now Navistar) into a moneymaking miniconglomerate with revenues near $100 million. The sales of Mid-States Technical, a staffing company headquartered in Davenport, Iowa, rose 79% in the two years after CEO Steve Wilson adopted the new approach; profits nearly tripled. Kacey Fine Furniture, in Denver, saw return on assets jump from the 1%-to-2% range all the way to 9% -- an astonishing figure for a retailer in a traditionally low-margin business.

Not surprisingly, the practitioners tend to wax evangelical about the management model behind the numbers. Kacey's Leslie Fishbein pronounces open-book management "the key to our competitive advantage in the marketplace." Others credit it with changing employee attitudes, with building trust, and even with reducing stress. Outside observers don't disagree. Chris Lee -- managing editor of Training, a magazine for corporate-human-resources professionals -- visited several open-book companies last year and came away dazzled. Open-book management, she wrote admiringly, is "some sort of lightning in a bottle."

Granted, we've heard big claims before, especially from the TQMers and the reengineers and all those other mavens of modern management. But the practitioners of open-book management argue -- convincingly, I have to say -- that they have something the other approaches don't. Open-book management not only gets people to act differently but gets them to think differently. It changes -- fundamentally -- the link between the employee and the company. Yet you don't have to rip up your whole organizational chart and send everyone to some faraway training institute just to get started.

Another thing: open-book management comes with a built-in self-regulator that ought to still the hearts of owners who fear letting go -- who worry that empowered employees will make stupid decisions and send the business south. The most important checks and balances -- the numbers -- are part of the system. If somebody makes a bad decision, its effects on the bottom line are right up where everybody can see them -- and react accordingly.

There is no standard set of rules for implementing open-book management. But there are a few basic principles and, by now, a lot of people who have experience putting those principles to work in companies.

In the next few pages, I'll share some of their experiences with you. And I'll sketch out a blueprint for action that might just transform your business, too.

* * *

What is Open-Book Management? Open-book management is a way of running a company that gets everyone to focus on helping the business make money. Nothing more, nothing less.

It throws out the old approach to management, in which bosses run the show and employees do what they're told -- or what they can get away with. It takes those trendy new management ideas -- empowerment, TQM, teams, and so on -- and gives them a business logic. In an open-book company, employees understand why they're being called upon to solve problems, cut costs, reduce defects, and give the customer better service. And they have a reason to do so.

If you could tear apart an open-book company and compare it with a conventional business, you'd see three essential differences.

· Every employee sees -- and learns to understand -- the company's financials, along with all the other numbers that are critical to tracking the business's performance. That's why it's called "open book." The numbers are up on the wall, in the handouts, on the computer network. Training courses and regular meetings teach everybody what they mean. So employees know whether they're making money. They know how much. They know why.

· Employees learn that, whatever else they do, part of their job is to move those numbers in the right direction. They may be salespeople or software designers, machine operators or telephone operators, engineers or stock assistants. They are also part of the business and are accountable to one another for their unit's performance.

· Employees have a direct stake in the company's success. If the business is profitable, they get a cut of the action. If it's not, they don't.

In effect, open-book management teaches people to quit thinking of themselves as hired hands (with all that implies) and to start realizing that they are businesspeople (with all that implies). Their job security, their chances for advancement, their hopes for the future all depend not on the whims of some boss or department head but on the company's success in the marketplace and each person's contribution to it.

Those are the bare bones. The stories of open-book management flesh things out; they show how the principles are implemented in real situations. Bob Frey told one such tale not long ago in the august Harvard Business Review.

Frey and a partner had bought Cin-Made in 1984. The little Cincinnati company was not what you'd call high tech: it made mailing tubes and other cardboard-and-metal containers on antiquated machinery. Nor was it a model of progressive labor relations. The previous owner, seeing profits dwindling to the vanishing point, had told her unionized workforce she couldn't afford the generous contract she had signed two years earlier. The response: Tough luck. No givebacks.

Not that Frey helped much when he took over. He stood around with a stopwatch, timing employees' moves. He once declared that the work looked like something a moron could do. By noon that day, he remembers, all the employees on the shop floor "had heard that I thought they were mentally retarded."

A few months later the contract expired. Frey said he'd have to have hefty wage cuts. The union went out on strike.

Frey and his partner tried to keep the factory going. That caused no end of mirth on the picket line. The obvious joke made the rounds: "Now there really was a moron running the machines." Before long, though, the strikers got scared. When Frey threatened to hire permanent replacements, the union advised its members to return.

So Frey had won the battle -- a 12.5% wage cut. But the war was raging as furiously as ever. The disgruntled workers "stuck to their job descriptions like glue," he recalls. They filed grievances at the drop of a hat. Peeved, Frey quit buying dinner for those working overtime, ending a long tradition. Morale plunged.

At some point, says Frey, he wised up.

The constant skirmishing and bickering were making him miserable. If they didn't stop, his business would be in jeopardy. He began to see that the company really needed the loyalty and cooperation of its employees. He began planning a change.

First he started holding monthly "state of the business" meetings, at which he showed everyone Cin-Made's financials and explained what the numbers meant. Then he instituted a generous profit-sharing program. The adversarial era was over, he said. Thenceforth everyone would get involved in helping the company succeed.

The employees were dubious -- wasn't this the guy who had cut their pay? Periodically, Frey would ask them how they'd solve one or another problem and they'd shoot back, "That's not my job." He'd lose his temper. "People had to understand that those were words they weren't allowed to utter."

But slowly -- very slowly -- the face-offs grew less frequent. Employees began paying attention to the numbers Frey kept showing them. They learned quality-control techniques. They began tracking scrap rates and labor efficiency. Before long, Frey and his employees were spending their meetings discussing year-to-date sales and operating efficiencies and profit projections. An employee committee took over scheduling. People began to solve problems on their own.

Half a dozen years after Frey's acquisition of Cin-Made, a new spirit was permeating the place. "I couldn't see how we were going to protect ourselves and keep our jobs if the company went under," reflects Ocelia Williams, a shop steward. "And I couldn't see how the company could work unless we all took our share of responsibility." Responsibility, indeed. Hourly workers now do all of Cin-Made's purchasing and have a voice in every hiring decision. They schedule their own hours, hire and supervise all temporary employees, oversee the company's safety program, and administer its skill-based-pay system. Productivity has more than doubled since Frey bought the company. Profit sharing accounts for about 35% of everyone's compensation. As for Frey, he admits to "having a hell of a lot of fun."

Granted, any thousand-dollar-a-day TQM or reengineering consultant can tell similar war stories. But what makes for lasting change? After all, workers in those famous Hawthorne experiments in the 1920s upped their output when the lighting was turned up -- and again when it was turned down. Trouble was, the improvements didn't last.

TQM and virtually every other hot new management idea suffer from a common failing. "We've gotten pretty good at teaching the 'how-to," says Mark Miller, an executive with the Chick-fil-A chain of restaurants in Atlanta. "But we forget about the 'want-to." TQM often peters out because nobody but the managers really cares about it. Once the first burst of enthusiasm wears off, why bother?

Open-book management, by contrast, teaches the want-to. Instead of telling employees how to cut defects, it asks them to boost profits -- and lets them help figure out how. Instead of giving them a reengineered job, it turns them into businesspeople. They experience the challenge -- and the sheer fun and excitement -- of matching wits with the marketplace, toting up the score, and sharing in the proceeds. As Bob Frey discovered, there's no better motivation.

Open-book management by itself isn't enough to turn a company around. Frey says he still needed a better product strategy and better marketing as well as better people management. No company can succeed without good leaders, adequate financial resources, and the ability to deliver a combination of price and value that appeals to customers.

But open-book management -- "lightning in a bottle" -- changes the essential logic of how people work together. No longer are those at the top trying to haul everyone else along. Everyone pulls in the same direction -- because all can see where they're going.

* * *

How to Implement It There isn't any cookbook-style recipe for open-book management. "It's more a philosophy than a how-to-do-it, step-by-step program," says Ronnie Miller, a plant manager at Pace Industries' Cast-Tech Division, in Monroe City, Mo. Still, if you put all the open-book practitioners into a room and asked them what they do, I think they'd come up with four precepts -- four steps you have to take before open-book management can work.

* * *

Step One Get the Information Out There Tell employees not only what they need to know to do their jobs effectively but how the division or the company as a whole is doing.

Every company has some pivotal operational numbers: On-time shipments. Customer returns. Most managers understand that employees have to see and track those numbers if they're going to affect them. Operational numbers alone, though, won't get anybody to think like an owner. Employees may keep a wary eye on the charts. But they're likely to feel as much resentment -- "Big Brother is watching us" -- as motivation. People aren't lab rats; if they don't understand why they're supposed to lower the defect rate or take those calls faster, they soon figure it isn't worth the trouble.

Open-book management is about the why -- and in a business, the why is told by the financials. So along with the operational figures, show people the income statement, the cash-flow statement, and the balance sheet.

Will they understand those documents? Not until you explain them, a subject we'll take up later. But numbers alone send a powerful message, even if they don't yet make sense. Everybody is a part of the company. Everybody sees the same information.

Then too, chances are good that employees will readily understand some financial figures -- the ones that are most important to your business.

· At Commercial Casework, a Fremont, Calif., furnishings and cabinetry company, the crucial number is variances on each job. So CEO Bill Palmer posts "Job Cost, Over and Under" up on the lunchroom wall. No one needs an M.B.A. to know which direction is good.

· At Acumen International, the personnel-assessment company, employees keep a hawkeye on the company's weekly cash. "What hits everybody's gut? How much money we have in the bank," says one manager.

· At Sprint's Government Systems Division -- it has operations in Kansas City, Mo., and Herndon, Va. -- revenues per employee is one of several critical financial gauges. "It's one way of looking at how well the organization is doing," explains Rick Smith, director of services for state and major local government. Again, no M.B.A. required.

How do you get the information out there? Put up scoreboards. Distribute it at meetings. Or avail yourself -- this is the information age -- of any number of high-tech methods.

When you walk into the lunchroom at Manco, for example, the first things that catch your eye are the big charts on the wall. The charts tally yesterday's sales, year-to-date revenues and expenses, year-to-date profits, return on operating assets, and a dozen other key numbers, each compared with figures from the budget and from the previous year.

And at Wednesday-afternoon managers' meetings at Foldcraft, a manufacturer of institutional seating in Kenyon, Minn., every manager reports the week's numbers and projections. Every number goes into the computer as it's reported, creating an income statement on the spot. "Then our cost accountant takes the disk out and has copies run," explains company president Chuck Mayhew. "In half an hour everybody has a copy. They take it back to their units and review it in their staff meetings."

As noted, this is the information age. Anderson & Associates, an engineering firm in Blacksburg, Va., puts its financials on its computer network. Herman Miller, the big furniture maker based in Zeeland, Mich., distributes videos detailing and explaining the company's numbers. Commercial Casework always has some of its employees out on job sites. They can't come to meetings, so Bill Palmer's brother Tom calls them on their cellular phones and walks them through the company's weekly income statement.

* * *

Step Two Teach the Basics of Business It's amazing how little most Americans know about business. Some believe that revenues are the same as profits. Or that profits are whatever a company has in the bank. Not many employees can tick off the expenses a company must pay. Not many know how little is often left at the bottom line.

Companies pay for that ignorance in at least three ways.

It spawns resentment. "When you're doing well, the question everyone asks is, 'Gee, that money must be stacked up in the basement -- we want more of it," says Clarke Kawakami of Black Diamond Equipment, a Salt Lake City maker of mountaineering hardware.

It leads to bad decisions. Should we throw out this part or remachine it? Does that customer deserve a refund? Should maintenance check the funny noise in the truck motor or just wait till it breaks? Companies these days expect employees to make those decisions, not to run to a supervisor (who has probably been let go, anyway). But if workers don't understand the financial impact of decisions, how can they make smart ones?

Finally, ignorance takes the fun out of business. Every entrepreneur knows that little secret: business is fun. It's a game. You take on the competition. Obstacles and opportunities crop up as frequently as in a video game. Every month or quarter you tally up the results and see how you did. What's more, there's real money at stake. Employees can share in the excitement -- and once they do, they'll give your company a kind of turbocharge. But not many people get excited about a process they don't understand.

How do you teach business? Start in a classroom -- maybe the way Foldcraft's Mayhew does. He developed a six-hour course in the basics, which he teaches to employees in groups of 30 or 35 at a time.

Then he creates a fictional chocolate-chip-cookie company, with simplified financials. Like Foldcraft, the company has bills of materials -- ingredients -- and routings, or the steps in the recipe. The class figures out standard costs and the effect of variances in, say, the price of flour, and compiles income statements and balance sheets for the cookie company.

Mayhew next brings out Foldcraft's actual financials and shows how the company's numbers correspond to the cookie company's simplified ones. At this point he delves into more complex matters, such as inventory costs. He explains the effect of purchasing variances, usage variances, and labor variances.

Finally, he brings it all home. "I go around the room and try to get an understanding of who's in there and what jobs they have. I actually try to talk to them individually in the classroom about what their jobs are and how they see them impacting profitability."

Classroom lessons won't stick, of course, unless they're reinforced every day -- on the job.

That's why Web Industries, a Westborough, Mass., converter of roll materials, often asks a frontline employee to explain the income statement at the monthly plant meeting. The designated teacher, usually a machine operator, sits down with someone in accounting a day or two before and, like any teacher, must know the material better than the students do.

And learning by doing is why Jim Jenkins of Jenkins Diesel Power, a Springfield, Mo., truck dealership, might give homework to his 18 service technicians. One recent exercise went something like this: You've learned how much the company bills for your time. You've learned what costs have to come out of the revenues you bring in. Now calculate how much more the company could earn if you could do in 59 minutes what now takes you 60. (The answer: $21,000 -- "right to the bottom line.")

What reinforces the learning best, of course, is the open-book system itself. When people see important information regularly, they find ways to learn what it says. If part of their income depends on that bottom line (see step four), you can bet they will soon understand which numbers have the biggest impact on it.

* * *

Step Three Empower People to Make Decisions based on What They Know Plenty of companies give lip service to the concept of empowerment, or employee involvement. They want participation! They call meetings! They set up project teams, cross-functional teams, self-managing work teams -- so many teams, a wag once remarked, that companies these days could be mistaken for bowling leagues. But since they don't share financial information, not many employees know how their work affects the bottom line.

That's like empowering someone to drive a truck -- without giving that person a map or a destination. Open-book management provides both.

Of course, you can't just announce that people are now empowered, any more than the Founding Fathers could just announce that the United States would have a democratic government. You need structures and procedures.

One approach, pioneered by SRC and widely adopted by others, is the so-called huddle system.

Representatives from SRC's departments and divisions meet once every two weeks to report their numbers and their opinions about the upcoming weeks and months. As at Foldcraft (no coincidence -- Foldcraft modeled itself after SRC), they generate an income statement, a cash-flow statement, and a forecast, which people take back to their own units.

In the units is where the work gets done. Managers help employees address problems. Every unit is accountable for its own numbers -- and every man and woman in that unit shares in the accountability. The units report new numbers to the corporate offices each week. If they're on target, fine. If they're off, those same men and women had better have an idea of why, and of how to fix it.

A second path to empowerment: turning the company into a collection of smaller but identical companies.

Published Image, a financial-newsletter publisher in Boston, has established teams that founder Eric Gershman calls "little Published Images." Each has its own editor, art director, and salesperson, and a couple of junior staffers. Unlike traditional teams, Published Image's act like self-contained businesses. They line up clients and negotiate prices. They take responsibility for producing their clients' newsletters, start to finish. They collect their own accounts receivable and are learning to keep their own books.

Gershman and other veteran managers oversee the teams, coach and train their members, and set companywide policies on matters such as compensation. But the teams' autonomy encourages members to think like businesspeople rather than like hired hands.

A third option: turning departments into business centers, so that every department becomes a company within a company. The units still have specialized tasks, unlike the teams at Published Image. But they're responsible for satisfying their customers, whether internal or external, and for their finances.

The exemplar of this approach is Chesapeake Packaging Co.'s Baltimore box plant, which has eight so-called internal companies. The flexographic-printing department is run by a "company" called Bob's Big Boys. Customer service is the province of a "company" called Boxbusters.

Like any business, the internal companies manage their own affairs. They track and measure output and figure out how to improve it. They watch costs. If they need new equipment, they order it -- or prepare their own capital-authorization requests for the corporate office. They get involved in the annual plantwide planning-and-budgeting process. The members of a company review one another's performance and take part in hiring and disciplinary decisions. Like businesspeople.

* * *

Step Four Make Sure Everyone -- Everyone! -- Shares Directly in the Company's Success, and in the Risk of Failure If you want people to think like owners, they must be rewarded like owners.

That isn't a controversial proposition: thousands of companies already have some kind of profit-sharing bonus system or employee stock ownership plan. But most of those plans don't have the motivational effects the management wants, for the simple reason that employees either don't understand or don't trust them.

Maybe the profit sharing is determined each year after the fact, at the management's discretion. Since employees don't know how the company is doing, any bonus that materializes might as well be pennies from heaven. Or maybe the stock-ownership plan puts a few shares every year into employee accounts. But workers don't know how many they'll get from year to year, they don't know what the shares may be worth in the future, and they don't have a clue how their own work affects that share value. That isn't what you'd call a world-class incentive.

An open-book company is different. Employees know what they're working for when they start the year. Like businesspeople, they track their progress by watching the numbers. At the end of four quarters, they know if they have been successful -- and they know why or why not.

Manco, for example, sets annual targets for net earnings and return on operating assets. If employees hit both targets, the company "makes bonus," meaning that employees collect payouts ranging from 10% to 50% of their total compensation. Want to know the prospects? Check out that lunchroom wall.

A bonus is a reward; it's also a powerful educational tool. So a lot of open-book companies use the bonus to reinforce key business lessons. Engines Plus, a Springfield, Mo., company that buys diesel engines and converts them to stationary power plants, pays bonuses that are pegged both to profit before taxes and to inventory accuracy. The latter is a critical operational number for the company, and CEO Eric Paulsen wants employees to focus on keeping it high. Kacey Fine Furniture paid a bonus in 1993 based on net profits and return on assets. Last year the company included a factor designed to minimize customer returns.

What about stock ownership? Open-book management can work without an equity stake -- I've seen it -- but it works better when employees own stock in the company.

The reason: business is always a game of trade-offs between the short term and the long. Do we raise everybody's wages and salaries, or do we invest more in expansion? Do we pay a big profit-sharing bonus, or do we hold on to the cash and thus raise our share value? Long-term payoffs, of course, redound primarily to a company's owners.